Skyward Specialty Insurance Group, Inc. Q4 FY2024 earnings call

• Finished the year strong with adjusted operating income of $0.80 per diluted share for the quarter, and $2.87 per diluted share for the year, up over 28% from 2023. Book value per share up 18% to $19.79, and ROE 16.3%. - Focus on shifting portfolio to less P&C cycle exposed areas (A&H, surety, captives, mortgage, credit, agriculture) accounting for 42% of Q4 gross written premiums. - Pricing: mid-single digit plus pure rate in some areas; retention strong in upper 70s; submission growth solidly in teens but modestly down from prior quarters. - 2024 was a watershed year; rebranded 5 years ago, positioned strongly for growth in 2025.

For the fourth quarter, adjusted operating income was $33.2 million or $0.80 per diluted share, and net income was $14.4 million or $0.35 per diluted share. For the full year, adjusted operating income was $126.7 million, up 57% from the prior year. Gross written premiums grew 21% for the quarter and 19% for the year, with surety, programs, captives, transactional E&S, and agriculture contributing to growth. Net written premiums grew 23% for the year, and retention was 64.5%, up from 62.4% the prior year. The fourth quarter adjusted combined ratio was 91.6% (including 2.2 points of cat losses from Hurricane Milton), and the year's adjusted operating combined ratio was 91.2% (driven by marginal cat loss ratio increase). Non-cat loss ratio for the quarter was 60.5% and for the year was 60.6%. Reserves increased $25.3 million in the fourth quarter related to LPT. IBNR now makes up over 69% of total reserves. Investment results: Q4 net investment income was $20.7 million, and full-year was $80.7 million, with fixed income portfolio net investment income increasing to $15.9 million from $11.7 million prior year, and embedded yield at 5.1% on December 31.

• 2025 net income expected between $138 million and $150 million. - Combined ratio expected 91% to 92% inclusive of 2 to 2.5 points of catastrophe losses. - Gross written premium growth expected in low to mid-teens.

• Concerns about increasing loss inflation in casualty lines impacting pricing and growth. - M&A would need to be proportional to avoid balance sheet risk and not disrupt organic growth. - Uncertainty around loss inflation trends and their impact on casualty line pricing and growth.

Q: Just looking at some of this early company data, it seems like there's still a lot of inflation in casualty, particularly in access. How do you see the adequacy of the pricing in that market? Do you think that's going to be a grower for you this year?

A: Thanks, Mark. Great question. Boy, there's a lot to that. So, let me just say, I think when I look across the market, there's a lot of folks that are reporting pretty hefty rate increases, generally in the occurrence liability lines. And I think what I'd say to you is that might be an indication that now is the time to grow there. I think for us specifically, we will take a more cautious approach. I don't differentiate this that greatly from our discussion a couple of years ago on cat. Cat market was like rock hard. People were loading up on it. It was pretty extraordinary and we just sort of stuck to our plan, right which is, let's be sensible. And in this particular case, I'd say that you can only be confident to the extent that you're confident in the loss inflation. And I think that there's probably not a company out there that is not surprised at the increasing loss inflation as compared to what they thought the loss inflation would be two or three years ago. And if that trend continues, it may very well be that 10 or 11 or 12 points of rate is not enough. And moreover, it's probably not enough if your starting point isn't right. And so, I think we're being really selective about where we're growing. We're trying to make sure that we're shying away from the places where personal injury, bodily injury may be most prevalent in sort of the loss makeup. And I think in that regard, we're being smart. But I do find it interesting, right, because there's a lot of companies out there growing and it seems like investors are applauding it when you see the growth particularly a lot of that's being driven by rate not as much as units. And like I wonder whether that ultimately is going to produce the kind of outcome that people believe it will. I think for us, we're taking a more measured approach as we have been over the course of the last probably eighteen months or so.

Q: How about your pace of hiring? You've done well growing the top line by adding new teams, new capabilities. How do you see 2025 shaping up?

A: I think that we are a winner, a very strong winner. We added 19 underwriters in Q4, a very difficult time to add underwriters. We had seven in surety, and I need not to sort of wax on about the wonders of our surety business. And by the way, back to your other question, Mark, it's a fantastic position to be in that we can grow there with people whose books of business will generally follow them versus having to sort of lean in on an uncertain loss inflation environment on casualty. So, I feel really good about it. We've definitely been a winner. I think our ability to attract talent is amongst the very best in the industry, and I don't see any reason that's not going to continue here in 2025.

Q: Maybe following on Mark's question there, I mean, you guys have obviously done a really good job adding teams and growing organically. Can you talk a little bit about how you view M&A? Just if it is part of the discussion, if it is off the table, if it's just something你look at, just want to get inside your head and think a little bit about how you, if there's a time and place for that or if that's just not for Skyward?

A: Yes. Thanks, Matt. So, here's what I'd say. Over sort of my five-year arc, right, we had a lot of work to do to get the business fully in the position that we wanted it to be in. And by the way, I'll tell you, we are there. I think that 2024 was a watershed year for us in many regards and I think we're there. That said, like we just delivered a 21% organic growth outcome. And by the way, we did it在places that maybe others aren't doing it, because we're having to work really hard on like if you want to grow in surety, right, you have to be able to attract great talent. So, the first thing我'd say is that we cannot do anything that impedes what is an incredibly successful organic engine that we've created here, and so that is topmost of mind. And then, the second thing of course is, if you're going to do M&A, you have to be proportional in terms of the kind of risk that you're taking on. If it brings with a balance sheet risk, we want to be incredibly measured there. That said, during 2024, we hired a Head of Corporate Development, Shakoor Khan, who had worked for me in my prior part of my career. I personally trained and developed them myself and we are much more active at looking at opportunities. But I would just say to you and to our investors that rest assured that the bar is exceptionally high because we recognize that even if something mathematically looks like it's accretive to our shareholders, it brings with it a different profile of risk and we neither can have any undue risk on anything that we may acquire. But more importantly, we just can't disrupt the organic engine that we have going as a company because it is really a distinctive feature of this company that I'm really proud of what we created and you just don't want to interfere with that.